Will Apple's Services Business Be Its Next Cash Cow?

With Apple (AAPL) expected to report third-quarter results after Tuesday's market close, any softness in iPhone sales should focus investor attention on how the less capital-intensive and growing Services business is performing.

Ahead of the report, Jim Cramer's Action Alerts PLUS maintained its latest view on the Services segment, expecting "recurring revenues at enhanced margins." Their price target on the stock is $190.

"We still expect Services to be the most important part," AAP Portfolio analyst Zev Fima said of the growing segment. "If Services are strong it will be enough to offset any third-quarter disappointment in unit sales."

In early afternoon trading, Apple stock was trading slightly higher.

Apple's Services business includes Apple Music, iCloud and Apple Pay. Growth in Services revenue has been outpacing the other portions of Apple's business. In the first quarter of 2018, growth Services was up 31% year over year, with $9 billion in revenue, more than a $2 billion increase. Sales of the iPhone in the first two quarters of 2018 were up 14%, totaling over $100 billion.

Apple's latest third-quarter guidance was for revenue between $51.5 billion and $53.5 billion, gross margin between 38% and 38.5%, and operating expenses of between $7.7 billion and $7.8 billion.

Analysts on Tuesday reiterated their bullish valuations on the tech giant, expecting Apple to issue earnings of about $2.16 a share, according to FactSet.

CFRA Research's Angelo Zino wrote that the expected introduction of an Apple television streaming platform would help drive Services growth for the company, predicting the segment would comprise nearly 20% of sales and a third of profits by 2019, with Services revenue of $50 billion in 2020.

Zino reiterated a price target of $230 on the stock. He noted that the introduction of new iPhone models this fall, including a lower cost model, should be competitive with cheaper Chinese headsets that have put price pressure on Apple and others.

"We see at least three new iPhone devices being launched this fall, which could offer upside to the September to December expectations," Zino wrote.

And Apple's Services business might be able to better stand its ground against a number of fierce competitors.